SEPA's Opportunity for Corporates and ACHs
Since the agreement of the European Monetary Union (EMU) in 1988, companies have dreamed of satisfying all of their euro-denominated payments needs from one account within the eurozone, rather than maintaining separate accounts in every country. The real push towards this vision began in 1999 and material benefits are now starting to be delivered. These efforts are intensifying, motivated by the EU’s Kok Report, which seeks to enhance the growth and competitiveness of Europe’s economy in part through creating more efficient payment systems.
Ultimately, the expected benefits of the Single Euro Payments Area (SEPA) to corporates include not only a single payments account and single payment providers, but lower costs, greater transparency of fees and a single route for multiple types of payments. The development of pan-European direct debit (PEDD) has the potential to open new markets for corporates and other initiatives, such as SWIFT’s MA-CUGs, Rosettanet and TWIST, promise a harmonised interface with trading partners and banks, in effect corporate straight-through processing (STP).
Progress to date has included the formation of the European Payments Council (EPC), which is responsible for SEPA payments standards, several legal initiatives from the EU, and the establishment of a cross-border transaction framework, STEP2. However, the creation of SEPA remains a work in progress and existing national automated clearing houses (ACHs) will have an important role to play. Payments, after all, is a volume game.
Recently, the EPC and the European Central Bank (ECB) articulated a clear timetable for the further development of SEPA. Credeuro, the standard for pan-European credit transfers, will become compulsory for cross-border transactions in the eurozone from the beginning of 2006. A pan-European direct debit scheme is proposed for implementation in 2008, at the same time as the introduction of harmonised debit card standards. Existing national payment schemes are to be phased out from 2010 and national banking associations are expected to prepare plans for migration to SEPA standards by the end of 2005.
The EPC’s intention is that migration to SEPA will be evolutionary, not revolutionary, and it is keen to maintain control as banks will bear the greatest burden of change. However, change is not exclusive to banks. Corporates and payment infrastructure providers are key stakeholders in the payments arena and are keen to embrace the opportunity to transform the way transactions are conducted in Europe.
It is not a question of whether consolidation in the European ACH market will occur but a question of when and how. With the introduction of a “SEPA for citizens” by January 2008, the ECB wants to see the emergence of “a fully fledged SEPA infrastructure” from 2010. As a result of the SEPA standards, all payments within the Eurozone will be interoperable; ACHs will have to compete in an open and competitive market, with banks free to select the payments provider that best meets their needs in terms of price, risk management and functionality.
As domestic payments systems around Europe disappear, volumes of the pan-European payment instruments will grow and the barriers to processing them will diminish. Genuine pan-European economies of scale will emerge and consolidation around larger and more scalable infrastructures is inevitable because, for the larger players, the marginal cost of processing one or even one billion more transactions is just that – marginal. As well as exploiting operational economies of scale, the European payments industry will also benefit from having to make fewer investments in new IT systems, rather than updating dozens of ACHs.
There seems to be broad consensus that in 10 years time there will probably be three to five ACHs in Europe. There are nevertheless barriers that need to be overcome. Assuming that local political and emotional resistance is addressed, structural matters need consideration, i.e. standards of interoperability are needed to guarantee that payments initiated through any pan-European ACH (PEACH) can be passed to another PEACH for delivery without a negative impact on clearing times.
The importance of interoperability and establishing a level playing field in a natural monopoly can be illustrated by a comparison to the telecommunications market and the ACH market in the US. We can use any telephone on any telephone line to call any other telephone and there is ample competition in liberalised markets for customers. The key development here is standards bodies that set the operating rules, technical specifications, and bilateral agreements on cross-network charges. This means that operators can be competitive without first having to set up a network to reach all of their customers.
In the US ACH market, electronic payments have undergone a similar development in recent years. In the 1970s, when there were numerous regional ACHs, each serving different parts of that country, and the Federal Reserve’s de facto technical standards allowed national payments to take place. Today, the National Automated Clearing House Association (NACHA) sets the operating rules and technical standards for ACH participation in the US, but any provider is welcome to offer ACH services, and any bank is welcome to participate.
There are two main ACHs in the US today, one operated by the Federal Reserve Banks and another by the Clearing House. These two ACHs pass payments files to and from each other for delivery and have agreed on bilateral cross-network pricing for delivering payments originated on the other network. Yet the two ACHs compete for business on price and services that go beyond what payments standards strictly require. The Clearing House, for example, offers centralised transaction screening services for fraud detection compliance with anti-money laundering regulations. On the back of these value-added services, the Clearing House has been gaining market share rapidly in the past three years.
The challenge – and the opportunity – facing national ACHs is to exploit their knowledge of national payments cultures and markets, which do differ substantially within the EU. National ACHs are trusted and often highly visible institutions. Traditionally, ACHs in smaller countries have centralised more functionality into their ACHs to achieve economies of scale at the ACH. Functionality in these ACHs can include validation checking, direct access for businesses, error handling protocols and systems to enhance bank account portability between customers.
In contrast, most larger countries (with perhaps the exception of the UK and the Netherlands), have generally preferred a more decentralised approach to payments processing The degree to which the EPC adopts functionality for SEPA schemes may give an advantage to ACHs with a particular heritage. In the UK, Voca has demonstrated that the combination of a functionally rich ACH and high volumes can be an exceptionally efficient model for the payments industry as a whole. Independent analysis suggests that this efficient operation saves the British banking industry around £200m annually.
For example, it is uncommon in Europe to allow corporates to submit files directly to the ACH, yet it represents a great convenience to corporates and cost savings for the financial services industry. Pan-European standards are unlikely to include this functionality as a mandatory element as most countries currently require a corporate to submit files to their banks before they are passed through to the ACH. Offering direct submission by corporates of files to the ACH in parts of Europe that are not accustomed to it represents a significant opportunity to increase the efficiency of the payments system for its customers.
SEPA provides a significant opportunity for corporates and ACHs. Corporates have much to gain from the initiatives already underway. It will result in lower costs, faster innovation and higher levels of service than the payments industry is historically known for. The recent support from the European Association of Corporate Treasurers (EACT) has been helpful and will encourage corporates to continue their involvement in SEPA developments through EACT and other appropriate avenues. A competitive and rational payments market can help make Europe’s payment system the most efficient in the world and make European corporates more competitive. All of which will make the treasury manager’s life easier.